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Wednesday, January 2, 2013

SPX and US Dollar: Rally Likely Only Half-Way Through

Last update, the market had finally flipped me from bullish to neutral -- but I noted that the market was clearly set-up for a large directional move (in fact, I titled the article "2013 Should Come in with a Bang"). I also noted the market seemed to be waiting on the fiscal cliff resolution.

I've been pretty consistenly bullish since November, but I won't deny that by last update, the bears had shaken my faith quite a bit. They pushed the market right to the edge; however, I felt they had not yet tipped it over and that critical support had not yet been breached.

Well, now we have our resolution, and -- proving that procrastination can be a winning strategy -- Congress has managed to live up to the phrase "Necessity is the mother of invention."

There is a very bullish set-up in the charts, and it's likely that we're only about half-way through this leg of the rally (with potentially much more to come over the long-term). November's intermediate target of 1490 +/- seems quite likely to be reached in the next few weeks or sooner.

As I noted in the last update, the Philadelphia Bank Index (BKX) was signaling the potential that the whole decline was complete, and overnight futures are now indicating that potential is indeed the reality.

The short-term BKX chart, which was posted as a waypoint on Monday, is updated below:

Given where the futures are trading this morning, the bear count is likely to be invalidated directly upon the open -- and a big gap up fits the pattern of a nested third wave rally (the expectations of the pattern) therefore, I'm not inclined to update the bear count at this time. I feel the bear count will become extremely low probability once the market trades above 1448, and that break will all-but-guarantee new highs above 1474.

At this point, it will take something completely unexpected, or a break of 1398, before I consider the bears as serious players again.

It should be noted that there is extremely bullish potential in the current market. This appears to be a third wave rally at several wave degrees (note the red ii at the November low), which opens up potential for a preliminary long-term target of 1680ish. There is another option, called an ending diagonal, which is less bullish, but would still see a trip into the high 1400's at the minimum. The bottom line is that the preferred intermediate counts of the past several weeks range from "pretty bullish" to "exceedingly bullish."

I do hope my warnings recently kept bears from over-committing. I know a lot of technicians were quite bearish of late, but I felt the bears never quite clinched the deal for a number of reasons. And every now and then in trading, just as in life, gut instinct beats everything. As I noted on 12/27:

Bears have a definite shot at taking control, and there are a number of signals right on the cusp of rolling into their favor -- and yet I have a gut feeling that bulls will somehow manage (yet another) stick save here.

Last update, I published the triangle potential that I had noticed in the US dollar -- and until 78.60 is broken, that potential remains for the time being. However, I continue to favor dollar bears for the intermediate term (either directly, or after further consolidation), and below is the preferred wave count for USD. The first alternate is the extended sideways correction (triangle; not shown), which basically just stretches out the consolidation before ultimately heading lower. I would rethink that outlook if bulls reclaim 81.46. (continued, next page)

In conclusion, this is not a rally I would look to short anytime soon. There is massive pent-up energy in the charts, and nested third waves are not to be trifled with. Third waves are the "point of recognition" for the masses, and tend to be strong trending waves that rarely let up for very long. Third waves tend to peg indicators at extreme readings and stay there for much longer than seems reasonable. In the next update, we'll get into more detail on the bigger picture. Trade safe.

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